MA Theses 2008

This paper investigates the effect of FDI on the enterprises’ performance. The main question of interest is whether the foreign direct investments positively affect all three sectors of the Ukrainian economy or not. The second objective of study is to investigate which FDI components are the most effective and have the highest influence on the performance. The results obtained using Ukrainian firm-level dataset show that the foreign enterprises perform better than the domestic ones in primary and secondary sectors of the Ukrainian economy. Both horizontal and vertical spillovers effects affect the firms’ performance and do vary by sectors. Liquid FDI components have a positive and significant effect; regarding illiquid FDI components, their impact is mostly zero.

Despite their intangible nature inflationary expectations do have real impact on macroeconomic variables and are considered to be one of the main factors in inflation formation in many developed countries. The present paper intends to study the characteristics of inflationary expectations in Ukraine employing the programmed composite Maximum Likelihood function and data set consisting of both survey data and aggregated macroeconomic variables. It turned out that inflationary expectations were not even weakly rational in Ukraine, which was also proved for some periods in the USA’s and UK’s economies. Moreover, in most of cases inflationary expectations used to overestimate the future inflation rate. The real impact of inflationary expectations on the future inflation was found to be rather ambiguous. This provides a space for further investigations in the sphere of macroeconomic dependence on economic factors of intangible nature.

The paper tests the unitary versus collective model of labor supply in Ukraine as a country in transition, estimating the equations for labor hours supplied by husband and wife. Application of 3SLS and GMM methods to the sample of working couples from Ukrainian Longitudinal Monitoring Survey. Empirical findings suggest that the unitary model restrictions are rejected by the data, while the assumptions of collective model are satisfied. The own-wage and cross-wage labor supply elasticities estimates and signs agree with the previous empirical evidence from the developed countries. Difference in spouses’ education level is found to be significant distribution factor influencing the intra-household nonlabor income allocation process and the spouses’ relative bargaining power. The revealed mechanism of family decision-making about the labor supply suggests that the collective model suites better for the economic analysis of labor market in transition countries.

Previous studies have shown that there is a significant impact of family income on the child health. Nonetheless, such relationship is not universal for all the countries. This work estimates such relationship for Ukraine and finds it significant. However, the sign of the relationship depends on the family type. As part of child health – income gradient, this work investigates impact of income on chronic diseases. Results reveal that income does not cause chronic conditions and there is only partial evidence that it can affect the degree of harmful influence of chronic disease on health.

The aim of the original research work is to investigate the relationship between relative income and life satisfaction in the case of Ukraine, using the data from Ukrainian Longitudinal Monitoring Survey in 2003-2004. The empirical research is conducted within relative deprivation theory framework, according to which a person compares his income to other group members and feels relatively deprived and therefore less happy when his income is below others. For the purpose of empirical analysis several reference measures for relative income calculation are proposed: based on geographical approach and personal characteristics of individuals – “people like me”. According to the results of the study people not only care about their absolute level of income, but also compare their income to the income of other people living in the same geographical area. Besides it is verified that males compare their incomes within the particular place of their inhabitance, whereas women also care about income of other women in their age group.

Goal of the Research: To estimate the effect of individual and household characteristics on poverty rates for male and female-headed Ukrainian households To measure the gender gap in poverty and decompose it.

The evidence of implementing a flexible exchange rate regime appeared recently in Ukraine. Proponents of this approach state that this step would accelerate economic growth of Ukraine, while opponents argue that it would put an unnecessary and sometimes unbearable “exchange rate tax” on the economy. This thesis is aimed to counter argue the latter by answering a question: “will the authorities (namely National Bank) have enough monetary based instruments and power to be capable to impact the exchange rate?” It is shown that by imposing Money Supply shocks Central Bank can indeed influence exchange rates in case of flexible regime. However, this possible impact is very small, which implies that Central Bank interventions would be justified only in extreme cases.

The main objective of this paper is to identify the determinants of optimistic expectations. The second objective is to find out which factors have the largest impact on formation of optimistic expectations. The economic motivation of the research is constructed on the basis of previous studies that showed that optimistic expectations do influence economic behavior both on individual and firm’s level. To achieve the first objective I use data from the Life in Transition Survey that covers 29 transition countries. I come to general conclusion that not material well-being determines optimistic expectations. In contrast, optimistic expectations are determined by such factors as satisfaction with economic and political situation and life satisfaction, as well as by factors that reflect the level of trust towards government, society and financial institutions. To achieve the second goal I analyze the size of marginal effects and come to the conclusion that variables that reflect subjective perception of current life-circumstances have the largest effect on determination of optimistic expectations.

Olena Iaroshchuk: “The impact of corruption on the firm performance: the case of transition countries”

Corruption is a problem that is common both for developed economies and emerging markets. However, it is considered to be even more important for countries in transition. This thesis delivers new evidence on the relationship between corruption and the firm’s performance in the transition countries. The results obtained point out a positive relationship between a bribe a firm pay and its growth rate. We interpret this by the necessity of giving grafts to officials in order to perform and perform successfully in the countries of transition.

Traditional theories on consumption behavior relying on the assumption of rational consumer often fail to explain differences in spending out of different sources of income. Keeping liquidity and regularity of income equal behavioral economists attempted to find alternative approach towards understanding the way the money is spent relaxing the assumption of fungibility (equal treatment) of income received. This paper aims to detect the differences in consumption (both in terms overall spending and specific groups of expenditures) out of sources of income that differ in the way income is obtained. The main hypothesis assumes that people not only try to put certain level of efforts to obtain money (time allocation problem), but also use them as a criterion for spending the income they obtain. Based upon survey of 3700 British students author finds weak evidence to support the hypothesis.

Apartments are heterogeneous goods, which are valued not only according to their structural characteristics (number of rooms, total living area, repair), but also by location and neighbor characteristics (unemployment rate, ecological situation, quality of schools etc.). Similar apartments located in different places are valued differently and spatial heterogeneity is observed. At the same time prices of apartments located in neighbor cities are correlated. In this paper I apply spatial analysis to eight Ukrainian regional centers and found that housing prices in neighbor cities directly affect each other, while omitted neighbor variables lead to the spatial correlation in error terms. This research can be used by real estate experts, home sellers and buyers for making decisions and forecasting future prices in some city after a change in prices in neighbor cities was observed.

This thesis investigated the existence of calendar effects for selected developing countries. The empirical analysis for the stock markets of selected CIS and CEE countries gives mixed evidence. Monday effect had only been found for a couple of countries by GARCH approach. Tuesday effect was not found for none of the countries. Friday effect had been detected by the bootstrap approach for 8 out of 13 countries while other approaches indicate the opposite. Day-of-the-month effect was found significant partly: returns for the beginning of the month are higher than for the rest of the month. Month-of-the-year effect had been found for a half of countries from the dataset however the dataset is too small to rely on these results.

This research examines the determinants of acquisition probabilities and prices for Ukrainian banks by means of simultaneous estimation using Tobit 2 model, employing 2005 – 2007 quarterly data on Ukrainian banks. To our knowledge, this study is the first to estimate acquisition probability and price simultaneously employing Tobit 2 model. In addition, this research is also the first to investigate acquisition probabilities and prices for Ukrainian banks and revealed several specific characteristics, different from the findings in previous literature. Specifically, these characteristics are negative effects of the ratio of loans to assets on the probability of acquisition and of bad loans reserves on the acquisition price.

This work addresses the question of firm’s performance and its probability of failure by employing a new approach basing on the Ukrainian joint stock companies of the non-financial sector. We use the discrete non-parametric proportional hazard model in order to be able to study the impact of the negative performance spell length in addition to traditionally used firm’s characteristics, such as liquidity, leverage, size, age and ownership. We find that there is a significant duration dependence in the firm’s negative performance. In the models which use firm’s growth as indicator of performance the duration dependence is positive, whereas profitability models show, that the probability of negative performance in the next period increases with the spell length up to some point, and then decreases. So, the firm can’t experience losses for a too long time: either its profits become positive or the firm exits. We also find that such firm’s characteristics as liquidity, size and age decrease the probability of failure.

This paper provides estimation of influence of type of party in power on economic growth. It fits into discussion of different economic policies provided by different parties and different levels of economic growth attributed to them. To achieve the goal we attempt to extend the bunch of existing instruments used in the researches in the area. In doing so, measure of averaged GDP growths under different executives was suggested. Using the extensive set of econometric methods and tests it was shown that these instruments are robust and have good predictive power. Additionally, these instruments are in accordance with theory of economic voting and, thus, could be used in further researches. The construction of such instruments is particularly important in the situation of absence of common instruments for all countries. Based upon the results of FE model with IV we found out that effect of left-wing parties on economic growth is higher than for right-wing ones, which is in accordance with results of previous studies. This relationship is supported by investigation of interregional and intergroup differences.

In this study, influence of per capita income on pollution is modeled with the help of the Environmental Kuznets Curve (EKC). The EKC pattern suggests an inverted U–shape relationship between per capita income and pollution. Starting at low levels of income, pollution increases along with income, but when income is large enough pollution starts to decline. The main finding of this study is that Ukraine follows the EKC pattern for some pollutants such as SO2, NO2, IZA while there is an increasing pattern for such pollutants as dust and CO2. For pollutants exhibiting the inverted U-shape relationship, we have estimated break points, and they appeared to be in the range $2000-$5000 in 2007 prices. The main prediction of the found EKC relationship is that the levels of SO2 and NO2 should start to decrease on the whole territory of Ukraine in the nearest future while the levels of CO2 and DUST are going to increase.

Oleksandra Kushnir: “Mergers and acquisitions in ukraine: case of banking”

This paper investigates factors which affect the probability of a Ukrainian bank to be acquired by a foreign investor. For this purpose logit estimation procedure is used. In addition, Cox proportional-hazard model is employed in order to estimate the likelihood whether or not a bank has been acquired during some period. The estimation results show that total assets have positive effect on the investor’s desire to acquire a bank. Such factors as returns on assets, riskiness of the loan portfolio and the number of branches are found to be irrelevant in the process of making decision about acquisition.

This study is dedicated to the analysis of socio-economic and political factors influencing differences in development that exist among the regions of Ukraine. Applying the spatial econometric model with spatial correlation in error terms, it has been found that there is positive significant spatial correlation in the regional income growth in Ukraine. By incorporating a dummy for political power of the region the effect of changes in the political environment in the country on regional development has been estimated, which indicates of a significant, positive but small effect that preferential political support has on the economic development of a region. Finally, it has been discovered that availability of human capital and capital inflows into the region are the main socio-economic factors affecting regional development, which is consistent with existing literature.

Nowadays, VaR technique is widely promoted by Basel Committee and is increasingly employed by major banks for calculation of capital reserve requirements. This paper uses Basel Back-testing criteria to compare the behavior of three base VaR approaches (LN(MA), LN(EWMA), HS) with two advanced VaR hybrid models (BRW, HW) that calculate exchange rate risk exposure of a large Ukrainian bank. The empirical study is based upon data on EUR, USD, RUB and GBP open positions and correspondent exchange rates for the period 6/1/2005 – 29/12/2007. This study shows that all five approaches except of LN(MA) model at 99% confidence level pass Back-testing successfully and therefore can be applied for determination of capital reserves. Empirical results demonstrated that performance of the HS model can be improved by applying exponentially declined weights to the historical data (HW hybrid model) or by scaling observations by the ratio of current and historical volatilities (BRW hybrid model). The reason behind this improvement is that hybrid models in contrast to basic models do not rely on the assumptions of normality and constant volatility of the exchange rates which are violated for Ukrainian emerging market.

Life insurance market of transition economies had experienced a rapid growth over the last decade, indicating the increased importance of this sector as a financial intermediary. However, the factors that drive life insurance demand across countries still remain unclear. The main purpose of the study is to identify and investigate the impact of the determinants of life insurance demand in Ukraine and several other countries of the region, both CEE and CIS. Using panel data analysis techniques for 14 countries over the period 1996-2006, I find that countries with higher life expectancy at birth, income level, old dependency ratio and countries-members of the European Union have higher levels of life insurance consumption, while financial development indicator, inflation and real interest rate reduce the demand for life insurance across countries.

Fiscal decentralization is the important point of issue for transition countries, which are still finding their optimal level of decentralization. Despite importance of this topic and availability of papers on decentralization in western and developing countries, there are no such studies for Former USSR countries. However, due to the fact that such studies are country sensitive, working with Former USSR countries seems to be more accurate, because these countries had more or less similar starting conditions.

Previous research demonstrates that only 34% of the cases of international economic sanctions are successful. This number leads the skeptical thoughts of the statesmen on whether economic sanctions should be implemented at all. However, separate analysis of episodes that consists of only threats and only sanctions provides different results. The success rate at the phase of the threat is 46% and at the post-imposition phase 38%. Such variables like the level of sender’s commitment, level of sender’s precision, offered aid and type of the institution that issued the threat describe the behavior of the sender. All of them appeared to be significant factors that determine the success of the case.

The inflow of FDI is especially welcome by the transition countries. FDI is expected to boost employment, brings new technologies, increase productivity and competitiveness of domestic firms. Understanding why a foreign investor decides to invest into particular firm is an important question especially for policy-makers. The objective of this paper is to investigate which factors do affect foreign investor’s decision: firm characteristics, region peculiarities or agglomeration effects. The analysis based on fixed effects logit model reveals that agglomeration economies are significant determinants of investment location. I also found that higher regional wages and more skilful employees attract investors, whereas unemployment deters. This suggests that government efforts to fight unemployment will additionally stimulate the FDI inflows.

The evidence for mean reversion in stock market prices is mixed. I use panel data on monthly prices for 36 stocks and PFTS index and SUR approach to test for mean reversion in Ukrainian stock market. I find strong evidence in favor of mean reversion. The speed of mean reversion estimated by the test significantly exceeds findings of other authors, implying half-life of mean reversion of six months. However, it is hard to distinguish between reasons that caused such result.

In this paper we investigate relationship between innovation input, innovation output and labor productivity at the firm level applying modified CDM model. The data collected by the State Committee of Ukraine covers 782 manufacturing firms in the period between 2004 and 2006. Our results show that firm’s size, government funding and previous success in innovation increase probability of expenditures on innovation by a firm. Government financial support also has positive effect on the amount of such expenditures. Furthermore, firms which undertake innovative efforts have higher chances to become either product or process innovators. Besides, firms which have introduced new or significantly improved product in the past are more likely to be a product innovator in the future. Thus, we have received a support for the “success breeds success”. Our findings also suggest that amount of innovation expenditures in the following period is influenced by firm’s productivity in the previous period. Evidence of this is quite rare in the literature. Finally, only process innovation has been found to contribute to productivity while the effect of product innovations on productivity is not significant.

This study investigates the influence of news on stock returns in Ukraine. Two types of news are considered: (i) a company news, and (ii) news concerning owners of some Ukrainian companies. The latter is studied in order to understand sensitivity of stock returns to political risks. The so-called market model is used for estimation. The data set consists of seventeen stock prices of fourteen privately owned companies and three state-owned companies. Different types of news about these companies and their owners were taken from public sources and the media. The results of estimation show that company news has significant impact on its stock return while the impact of the news about the owners of the company is statistically significant only for several companies. General conclusion of this study is that Ukrainian liquid stocks react to the news as predicted – returns are positive in the case of good news and negative in the case of bad news.

In this research I investigated the impact of late privatization on the growth of labor productivity for Ukrainian industrial, agricultural and services firms during 1991-2005. Despite long history, the issue of privatization and especially the effectiveness of different methods is still widely discussed in Ukraine. The specification suggested by Earle and Telegdy, 2002 was modified to study for the first time late privatization outcomes with a particular focus on such methods as sales on auctions, share sales, management-employee buyouts, and leasing buyouts. Estimation results show that overall, private ownership is associated with 8% to 12% of additional productivity growth in services and manufacturing, while as in agricultural sector found no significant difference. The research provides strong evidence to support the opinion that share sales method was the most effective in all sectors of economy.

The rapid development of Ukraine’s economic and financial systems for the past five years has led to significant shifts in its Balance of Payments (BoP) position. In this thesis I study the determinants of CA deficit using the macroeconomic data of major East European countries. The motivation of my research is to apply the obtained results to Ukrainian realities following the main assumption that Ukraine exhibits general trend of the East European region both economically and politically.

This study investigates stock prices volatility and asset returns in transition economies, specifically Ukraine. Transition countries have volatile stock markets compared to developed countries. This makes classical GARCH models perform poor forecast in marketos of transition countries. This study proposes a new model – multifractal Markov-switching model (MSM) to address limitations of GARCH models. The multifractal model uses fractal properties found in the stock returns : (i) long memory, (ii) lags decay hyperbolically, slower than expo- nentially, (iii) not normal fat-tailed distribution, (iii) different degree of long memory. These properties significantly increase the forecasting accuracy of MSM model. Three criteria where used to evaluate and compare the forecasting power of MSM and GARCH models: relative MAE, relative MSE and portfolio annual return in Ukrainian PFTS stock market in 2007 balanced with the help of the forecast of expected return and risk. All three criteria indicate that MSM model significantly outperforms the GARCH model in the stock market of the transition countries. The annual portfolio return balanced with the help of MSM forecast outperformed the market return by 27.35%, while annual return of the portfolio based on the GARCH forecast showed 6% less then market.

The thesis aims to investigate productivity issues. It discovers what were the contributions of innovations (How much the production frontier shifted?) and efficiency changes (Does the distance to the production frontier become shorter?) to the Russian banking sector development within the period under study. A dataset on 106 Russian banks (1999-2004) was utilized to decompose productivity onto innovation and imitation components. Additionally, the impact of the post-default deregulations on the productivity growth was analyzed. It was found that incentives to innovate and productivity of private banks decreased in the period of regulations and increased in the period of deregulations. Besides this, the obtained empirical evidences suggest that the deregulations had a significant positive effect on the technical efficiency of the banks headquartered outside Moscow (1.75-1.83%).

In this research we try to investigate the degree of cointegration between Central and Eastern European emerging stock markets. We argue that the relationships between counties are different in the long-run and short-run and, as a consequence, investors who exclude this possibility will construct their portfolios suboptimally. In addition to this problem, strong stocks comovements restrict the possibility of international systematic risk diversification. We use a threshold cointegration model for Central and Eastern European countries in order to test the hypothesis of their comovement, which will be useful for the construction of an optimal portfolio and for efficient hedging within this region.

The study investigates whether spatial dependence is present in the growth equation for Ukrainian regions and, if so, how it affects growth determinants. For this purpose spatial lag and spatial error models are estimated for real GRP per capita and its growth rate. The results show that spatial spillovers are highly significant for the growth equation and tend to reduce the impact of other growth determinants. For the GRP per capita specification spatial patterns are not observed. Finally, estimated spatial model is applied to compute the effect of growth in neighboring countries on development of bordering regions, and calculate emanating effects from possible investments into the regions that host Euro 2012.

Building on theoretical and empirical evidence we investigate the determinants of income inequality across countries. We estimate how strongly economic development, corruption, government expenditure and international trade contribute to income inequality. Estimating the influence of economic development we find the evidence of the Kuznets hypothesis. Our results suggest that in the long run the international trade affects income inequality. In the short run, however, its impact is insignificant. We also check whether corruption influences negatively on the efficiency of government social expenditures. In our research we apply Fixed Effects, Random Effects and panel data Tobit model with Fixed Effects for two datasets, one of which is taken from previous research and the other is constructed from the World Income Inequality Database. Additionally, we argue that due to cultural, historical and political differences the level of income inequality and the links vary across groups of countries. Choosing developed countries as our base group, we introduce regional dummies for Latin America, Central and Eastern Europe, current members of The Commonwealth of Independent States, Asian region, Middle East and North Africa and Sub Sahara Africa.

Leap year wedding superstition is a wide-spread phenomenon in Ukraine. It states that a marriage in a leap year is likely to end up with a divorce. In this study the leap year wedding inconsistency is addressed statistically. In doing so, ULMS (2003) data set is used. Based on a series of comprehensive statistical tests it is shown that the fraction of divorces and average duration of marriages in leap years are not statistically different from the same indicators associated with non-leap years.

The aim of this paper is to estimate the level and dynamics of microeconomic flexibility in Ukraine during 2001-2005 years and analyze the factors and consequences involved. The data used in this paper is the panel of around 650 000 firm-years. Microeconomic flexibility captures the speed with which establishments adjust to different productivity shocks by means of changing the employment level. It was shown that the number of employees in an establishment is positively correlated with the level of microeconomic flexibility. Additionally, the evidence was presented that the size of the gap between the desired level of employment and actual level of employment is directly related to the level of microeconomic flexibility. Microeconomic flexibility exhibits declining path during 2003-2005 years in Ukraine.

This paper tests the hypothesis of inverse relationship between farm size and productivity for Ukrainian farmers. Several approaches were applied in order to determine which factors, and in particular how land size effect farm productivity. The value of output per hectare and technical efficiency were taken as a measure of farm productivity. Technical efficiency was estimated by two methods – non parametric DEA and parametric SFA. It was found that the relationship between farm size and productivity is nonlinear – productivity rises first and then falls. Ukrainian farms were found to be highly unproductive due to inefficient use of land resources. The calculated optimum size of land plot was determined to be larger than the average actual size of own landholding, and this might be an important argument for canceling of landselling moratorium in Ukraine.

In this work we study the impact of alcohol consumption on wage in Ukraine. Using Ukrainian Longitudinal Monitoring Survey data set for 2003 and 2004, we find positive association between alcohol consumption and wage by OLS specification. Once we control for individual fixed effect, the positive impact of alcohol consumption strengthen for males but the effect disappears for female. Overall, we conclude that Ukrainian empirical evidence is consistent with that of other countries, although some country specifics are also present.

In the last several years in Ukraine the number of foreign banks and banks with foreign capital has sharply increased as well as their market share. This paper studies the impact of such an increase on the efficiency of Ukrainian banking system. Two dimensions of this effect are found to be significant: number of banks entering the market and their market share. New banks that come to the market tend to have a negative impact on efficiency, while increasing market share of foreign banks contributes to lower interest rate spread and higher efficiency level. However, the hypothesis that foreign banks operating on Ukrainian market are more efficient than domestic banks failed to be supported. At the same time economy of scale works in banking system of Ukraine: larger banks charge lower interest rate spread.

The study investigates whether efficiency of electricity distribution companies influence the value of the company in Ukraine. The answer goes through the investigating the question of cost efficiency of electricity distribution companies from 2003 to 2006. We estimated cost efficiency score using SFA. Using panel of data we have found high efficiencies in cost. Based on OLS, fixed and random effect estimations we found positive but insignificant influence of cost efficiency on the value of the company.

The first study that investigates internal migration on the micro level in Ukraine Importance: specifics of migration determinants during transition period in Ukraine; forecasting the migration flows in different dimensions (regions, socio-economic groups etc.)

The study analyzes the relative efficiency for city public clinical hospitals in Kyiv for period 2001-2005. This period encompasses activities that were directed on re-orientation of health services provision from inpatient to outpatient care. The study was focused on measuring the influence of transformations on improvements in hospitals’ performance. Measurements of relative efficiency were calculated by using non-parametric Data Envelopment Analysis and bootstrap technique. The results of re-orientation were expressed in terms of efficiency score and relative difference between aggregated efficiency scores of hospital groups. The impact of re-orientation efforts was found to be statistically insignificant from structural side but areas of influence on efficiency during next step of reforms were identified.

This paper provides estimation of the knowledge production function across 25 regions of Ukraine and explores the role of spatial knowledge spillovers in the production of innovations. The analysis is based on the statistical dataset of innovative activity provided by State Statistical Committee of Ukraine from 1998 till 2006. It appears that innovative inputs (Expenditures on R&D, high-skilled human capital and openness of the region) have significant impact on the level of innovations in the region. Moreover, it was found that spatial knowledge spillovers positively affect the innovative activity of Ukrainian regions.